Even If It Does Not Say So, an Arbitration Agreement May Preclude Class Actions

Nearly two years ago, in the now infamous D.R. Horton decision, the National Labor Relations Board ruled that it constitutes an unfair labor practice for an employer to require, as a condition of employment, that employees arbitrate claims as individuals rather than a class, unless a union has agreed to such arbitration provisions. Since that time, various federal courts have rejected the ruling, but the Board continues to consistently apply it despite these federal appellate rulings. Most observers expect that the United States Supreme Court will either take up one of the many challenges to D.R. Horton or vacate the decision in connection with the constitutional challenge to President Obama’s 2012 NLRB nominees, now pending before the Supreme Court.

Nevertheless, because of the NLRB’s national reach, D.R. Horton is still controlling on most of the nation. And not only is the Board continuing to apply it, there may be reason to believe the full Board could extend D.R. Horton even further if it approves a recent administrative law judge decision. Interestingly for employers, the recent decision supports the argument that even if an arbitration agreement does not expressly preclude an assenting employee from bringing class claims, his or her execution of an arbitration agreement nevertheless effects in practice a waiver of the ability to bring a class or collective claim.

In the recent decision, the employer had its employees sign an arbitration agreement that “does not, on its face, prohibit collective or class action” and is in fact “silent as to collective or class actions.” A former employee sued in California state court alleging class claims. After removing the case to federal court, the employer sought an order compelling arbitration of the employee’s individual claims and dismissing his class claims. The former employee responded by filing an unfair labor practice complaint with the NLRB. Meanwhile, the federal court granted the motion to dismiss the employee’s class-wide claims, and finding the individual claims must proceed to arbitration.

Despite the fact that the employer’s arbitration agreement did not expressly prohibit collective or class treatment, the administrative law judge concluded that the employer effectively precluded the employee from exercising his right to engage in protected concerted activity. The judge so reasoned because the arbitration agreement, while silent about prohibiting collective or class actions on its face, had the effect of doing so as evinced when the employer, in moving to compel arbitration of his claims, sought to preclude the employee from filing a class action lawsuit. In practice then, the administrative law judge found, the employer closed the avenue to pursue class litigation when it sought to limit the employee and other employees to arbitration of individual claims.

Following the logic of the administrative law judge’s decision, employers using arbitration agreements – even if they are silent on the issue of class treatment – have another arrow in the quiver to show that agreements to arbitrate preclude class action treatment. Employers of course should note both that for now, the decision is not position of the full Board just as they should continue to remember that the NLRB’s position that, for now, the use of such agreements likely constitutes an unfair labor practice and evaluate the associated risks. However, as noted above, the federal appellate courts have not endorsed the Board’s position, and the ultimate viability of D.R. Horton’s assertion that many arbitration agreements that waive class treatment violate the National Labor Relations Act, will remain questionable until the Supreme Court offers further guidance.

Regardless of where this issue ultimately shakes out, the recent decision continues to demonstrate how the law surrounding arbitration clauses in employment agreements continues to shift, and will likely shift again in the near future. Employers would be wise to periodically consult with counsel to review employment agreements, and arbitration clauses in particular, to ensure they do address the latest legal developments in these changing times.

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